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Bharat Forge: Exports take the cake - Views on News from Equitymaster

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Bharat Forge: Exports take the cake

Aug 6, 2014

Bharat Forge has announced its June 2014 quarter results. The company has reported a 25% YoY and 60% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Standalone topline for the quarter grows 25% YoY, exports grow by a strong 39% YoY
  • Operating margins see a strong improvement, leading to a 45% growth in operating profits
  • Bottomline grows by a robust 60% YoY on the back of strong operating performance and lower interest costs

Standalone performance snapshot
(Rs m) 1QFY14 1QFY15 Change
Sales 7,916 9,881 24.8%
Expenditure 5,955 7,048 18.4%
Operating profit (EBDITA) 1,961 2,833 44.5%
Operating profit margin (%) 24.8% 28.7%  
Other income 354 242 -31.7%
Interest 354 316 -10.7%
Depreciation 611 658 7.7%
Profit before tax 1,350 2,101 55.6%
Tax 444 651 46.6%
Profit after tax/(loss) 906 1,450 60.0%
Net profit margin (%) 11.4% 14.7%  
No. of shares (m) 232.9 232.9  
Diluted earnings per share (Rs)*   19.0  
P/E ratio (x)*   40.1  
(*On a trailing 12-month basis and
excluding extraordinary items)

What has driven performance in 1QFY15?
  • The company's sales were up an impressive 25% YoY during the quarter. This was largely due to the 39% growth in export revenues as domestic revenues were up by a mere 9% YoY. Exports did strongly largely led by the North American market. The CV market in this region continued to be robust on the back of sustained levels of construction activity and improving economic scenario. The replacement of older fleets with more fuel efficient models has also played a role in fueling demand. Thus, the US grew 76% YoY during the quarter. Europe and Asia Pacific were up 3% and 21% respectively.

  • Coming back to India, the CV sector volumes declined by 15% YoY and thus were responsible for the relatively lukewarm growth in the company's sales from the domestic market. However, with industrial growth starting to show signs of a revival and with GDP growth expected to improve, the company's outlook for the sector remains positive.

  • Important to add that the company's shipment tonnage was up 19% YoY, indicating an improvement in the product mix of the company.

    Cost break-up...
    (Rs m) 1QFY14 1QFY15 Change
    Raw materials 3,252 3,591 10.4%
    % sales 41.1% 36.3%  
    Staff cost 707 795 12.5%
    % sales 8.9% 8.0%  
    Manufacturing expenses 1,385 1,849 33.5%
    % sales 17.5% 18.7%  
    Other expenditure 611 812 33.0%
    % sales 7.7% 8.2%  
    Total 5,955 7,048 18.4%

  • Operating profits grew by 45% YoY during the quarter as barring other expenses all the other cost heads grew at a lower rate than the sales. Margins also improved on the back of a favourable product mix and exchange realization and increased capacity utilization.

  • PBT of the company came in higher by 56% YoY as besides higher operating profits, lower than proportionate increase in depreciation charges and reduction in interest costs also helped matters a great deal.

  • At the bottomline level, profits came in higher by 60% YoY led by the strong growth in PBT.
What to expect?
At the current price of Rs 761, the stock trades at 34.4 times our estimated FY16 earnings per share on a standalone basis. As part of the company's strategy of focusing on the global passenger vehicle segment and reducing dependence on CVs, the company is beginning to see signs of good growth on that front. As the past order wins start ramping up, Bharat Forge expects the contribution of passenger vehicles to standalone sales to increase further. The company is confident of more traction in terms of order wins from both global and domestic OEMs in this space. Growth going forward will also be driven by the industrial segment as demand improves and also from exports. That said, despite good growth prospects, given that the stock of Bharat Forge is fairly valued at the current price, our view is that investors not buy it at current levels.

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